What Exactly Is Substantive Research?

A Seven-Step Guide for Sell Side and Independent Research Providers

Denny Ellison, in collaboration with Neil Scarth of Frost Consulting, has published a report following the review of the regulators’ definitions of ‘Substantive Research’.

With the implementation of MiFID II scheduled for January 2018, the equity research industry is on the doorstep of a major transformation.

Whilst the regulation primarily addresses the way in which asset managers pay for research, in this report we focus on the impact of the regulation on sell side equity research providers, and in particular on companies based in the UK that are subject to MiFID II as interpreted by the Financial Conduct Authority (FCA). We also give guidance as to how providers can position themselves to claim their share of the research spending pie.

According to the MiFID II and FCA rules, asset managers should only use commissions (i.e. their clients’ money) to pay for external research if it qualifies as “substantive research”. This includes all research products and services such as research reports, access to analysts, expert panels, company models, etc. that:

i) add value to the investment decision with new insight

ii) represent original thought

iii) have intellectual rigour, and

iv) present meaningful conclusions based on the analysis of data.

Short notes such as previews and post-results notes or market updates that do not include a new investment case are not seen as substantive by the regulators and are thus deemed minor non-monetary benefits from the sell side.

We believe that Frost Consulting’s concept of “research as a service” is a very effective way to value research.

In our opinion, it is likely that many buy side firms will choose to subscribe to research packages that include a mix of reports and services, some of which are substantive. Whether these packages are on a per sector or team basis, or whether they include the whole offering from a research department, they are likely to differ from one sell side provider to another.

We believe it is essential for sell side providers to prepare and position their research offerings ahead of and during the MiFID II implementation phase and we have identified seven key steps to that end:

  1. Determine which research products and services each client values most
  2. Comply with the regulators’ qualifying criteria regarding substantive research
  3. Consider “research as a service” and maximise each research package
  4. Streamline what is not substantive but still valuable to the buy side
  5. Focus on differentiated offerings
  6. Advertise, market and sell your products and services differently
  7. Target specific clients


The full report can be downloaded for free at http://training.dennyellison.com.

Denny Ellison Enterprises Limited is a research and training company based in London, UK.